{"id":9276,"date":"2021-02-02T15:00:00","date_gmt":"2021-02-02T21:00:00","guid":{"rendered":"https:\/\/www.lexingtonlaw.com\/blog\/?p=9276"},"modified":"2024-05-06T14:13:24","modified_gmt":"2024-05-06T20:13:24","slug":"how-does-refinancing-a-student-loan-affect-credit","status":"publish","type":"post","link":"https:\/\/www.lexingtonlaw.com\/blog\/loans\/how-does-refinancing-a-student-loan-affect-credit.html","title":{"rendered":"How does refinancing a student loan affect credit?"},"content":{"rendered":"\n
\"\"<\/a><\/figure><\/div>\n\n\n\n

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice.<\/em> See Lexington Law\u2019s editorial disclosure for more information.<\/em><\/a><\/p>\n\n\n\n

If you\u2019re considering refinancing a student loan, you need to have answers to all of your questions. For starters, does refinancing student loans affect credit? Fortunately, student loan refinancing doesn\u2019t have to negatively affect your credit, but you need to know how to go about the process carefully and fully informed. Since refinancing comes with several benefits, it\u2019s nice to know that you can consider this option without it killing your credit. <\/p>\n\n\n\n

What is a student loan refinance?<\/h2>\n\n\n\n

Student loans can come from two sources: federal funding and private funding. Federal student loans come with some benefits, such as subsidized interest while you\u2019re in school and the potential to apply for a loan forgiveness program. <\/p>\n\n\n\n

Unfortunately, you can\u2019t refinance a federal student loan with the government. Refinancing is always done through a private lender. While going to a private lender may sound scary, refinancing can save you money. <\/p>\n\n\n\n

When you refinance, you take your student loan(s) to a lender and negotiate a better interest rate or a more manageable monthly payment. This can help you save thousands during the life of your loan, but how much money you save depends on a number of factors\u2014such as fees for refinancing, the decrease in interest rate and the length of your new repayment term. <\/p>\n\n\n\n

Protect your credit during a student loan refinance<\/h2>\n\n\n\n

Credit inquiries and missed or late payments are the two factors that might impact your credit when you go through student loan refinancing. But if you\u2019re careful, you can minimize the damage done to your score during a refinance.<\/p>\n\n\n\n

Credit inquiries<\/h3>\n\n\n\n

When you initially approach a lender about refinancing, they\u2019ll conduct a soft inquiry on your credit to see if you\u2019re eligible. However, once you officially apply with a lender for a refinance, there will be a hard check on your credit. A hard inquiry<\/a> can lower your credit score by a few points. <\/p>\n\n\n\n

These few points are easy to recover if you continue to be responsible with your credit. But if you have multiple hard inquiries within a relatively short period of time, your credit score may drop significantly\u2014potentially up to 10 points per credit inquiry. <\/p>\n\n\n\n

To avoid this situation, try to submit as few applications as possible. To be clear, that doesn\u2019t mean you shouldn\u2019t compare your options. It\u2019s in your best interest to approach several lenders to see who can offer you the best terms and lowest interest rate. You can still shop around and compare lenders\u2014just don\u2019t fully apply with every lender. <\/p>\n\n\n\n

Lenders should be able to give you a good idea of your options when they pull a soft inquiry on your credit. Let your lenders know you\u2019re comparing rates so they\u2019ll begin to offer you more competitive terms. <\/p>\n\n\n\n

In addition, most credit bureaus have a 14 to 45 day \u201cshopping period.\u201d If you have multiple hard inquiries within this time frame, a credit bureau may count it as only one inquiry. Whenever possible, try to keep your inquiries to this small window of time, ideally ranging between two and four weeks.<\/p>\n\n\n\n

Payments<\/h3>\n\n\n\n

Your student loans are tied to your credit. Every time you miss or make a late payment, it negatively impacts your credit history and your credit score.<\/a> If you\u2019re considering refinancing, you must make all your payments on both your past loan and your refinanced loan until you\u2019re absolutely certain the previous loan has ended. After you know the transfer is complete, you can make payments on the refinanced loan only. <\/p>\n\n\n\n

When should you refinance?<\/h2>\n\n\n\n

When it comes to refinancing a student loan, timing can be everything. For this process to be worth it, you need to have a decent credit score and a stable income. These two factors will ensure that when you go to lenders for refinancing, they\u2019ll offer you a lower interest rate than the one you currently have. <\/p>\n\n\n\n

Two downsides of refinancing a student loan<\/h2>\n\n\n\n

Refinancing isn\u2019t the best choice for everyone, and there are two main downsides you should know about. <\/p>\n\n\n\n

Your interest rate might not decrease by much<\/h3>\n\n\n\n

Student loan interest rates have remained relatively low in recent years.<\/a> This means private lenders don\u2019t have much leeway and may not be able to offer you an interest rate that\u2019s much lower. <\/p>\n\n\n\n

That being said, even a small decrease in interest can make a significant difference over the lifetime of a loan. For example, let\u2019s say you had a $30,000 student loan with a 10-year payment period. Your initial loan interest is five percent, and a refinancing lender offers to lower your interest to four percent. A one percent difference may not sound like a lot, but it\u2019ll save you $1,736 in interest over 10 years. <\/p>\n\n\n\n

One thing to note is to take into account any fees for refinancing when comparing your loans. If your refinance lender is charging you a $200 sign-up fee, that will eat into your savings. <\/p>\n\n\n\n

You\u2019ll lose access to benefits of federal funding<\/h3>\n\n\n\n

You can only refinance with a private lender, which opts you out of any benefits of federal funding. If you opt out of federal student loans, you lose access to federal repayment options such as the income-driven repayment plan. <\/p>\n\n\n\n

You also lose the ability to apply for federal loan forgiveness programs. Several federal loan forgiveness programs for candidates such as teachers, military service members and public servants may forgive a portion or all of a loan under specific conditions. These programs are often difficult to qualify for, but it may be worth sticking to it if you were already on this path. <\/p>\n\n\n\n

Who shouldn\u2019t refinance<\/h2>\n\n\n\n

If you have poor credit or unstable income, you\u2019ll likely be denied refinancing or get an interest rate that isn\u2019t better than your current interest rate. If this is the case for you, focus on improving your credit score<\/a> and reapply for refinancing later on. <\/p>\n\n\n\n

Additionally, people who are close to the end of their loan term typically won\u2019t see any benefit from refinancing. If you\u2019re almost done paying off your student loan, simply focus on getting to your end goal. <\/p>\n\n\n\n

Is refinancing the best option for you?<\/h2>\n\n\n\n

Ultimately, the decision to refinance should be made on a case-by-case basis. You need to weigh all the pros and cons of refinancing before making a decision.<\/p>\n\n\n\n

A useful tool when evaluating refinancing is a loan calculator. These online calculators help you determine just how much you can save if you refinance a loan. Don\u2019t forget to subtract any fees from your savings to depict your actual savings accurately. <\/p>\n\n\n\n

Your student loan will impact your credit for many years to come, and your credit has a long-reaching impact on other areas of your life. Whether you refinance or continue with your regular student loan, make sure you build responsible habits with your loan repayment. Sign up for auto-pay, make additional payments if you can<\/a> and track your progress. <\/p>\n\n\n\n

Note:<\/em><\/strong><\/a> Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Does refinancing student loans affect credit? Learn all about student loan refinancing and whether it\u2019s right for you with Lexington Law.<\/p>\n","protected":false},"author":63,"featured_media":14834,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[528],"tags":[281,114,524,318,464,399,398,372],"yoast_head":"\nHow does refinancing a student loan affect credit? - Lexington Law<\/title>\n<meta name=\"description\" content=\"Does refinancing student loans affect credit? 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